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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

   
R
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2012
 
or
£
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                                                       to

Commission file number: 333-167650

GXS Worldwide, Inc.
(Exact name of registrant as specified in its charter)
Delaware
35-2181508
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer Identification No.)

9711 Washingtonian Boulevard, Gaithersburg, MD
20878
(Address of principal executive offices)
(Zip Code)

301-340-4000
(Registrant’s telephone number, including area code)

None
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes R  No £

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes R  No £

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer £
Accelerated filer £
Non-accelerated filer R
Smaller reporting company £
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes £ No R

As of May 11, 2012, the registrant had 1,000 outstanding shares of common stock, all of which was held by an affiliate of the registrant.



 
 
 

 
GXS WORLDWIDE, INC.
 
QUARTERLY REPORT FOR THE QUARTER ENDED MARCH 31, 2012
 
 
 
    Page
PART I.
FINANCIAL INFORMATION
 
     
Item 1.
Financial Statements
 
     
 
   4
     
 
   5
     
 
   6
     
 
   7
     
 
8
     
 
9
     
Item 2.
28
     
Item 3.
         40
     
Item 4.
         41
     
PART II.
OTHER INFORMATION
 
     
Item 1.
         43
     
Item 1A.
         44
     
Item 2.
         44
     
Item 3.
         44
     
Item 4.
         44
     
Item 5.
         44
     
Item 6.
         45
     
     
SIGNATURES
 
         46
 
 
2

 
 
In this Quarterly Report on Form 10-Q, all references to “our,” “us,” “we,” “the Company” and “GXS” refer to GXS Worldwide, Inc. and its subsidiaries as a consolidated entity, unless the context otherwise requires or where otherwise indicated.  All references to “Inovis” refer to Inovis International, Inc., which the Company acquired on June 2, 2010, the “Inovis Merger” or the “Merger”.  All references to “RollStream” refer to RollStream, Inc., which the Company acquired on March 28, 2011.

The common stock of GXS, Inc., GXS Worldwide, Inc.’s only subsidiary, is collateral for the Company’s 9.75% Senior Secured Notes due 2015.  Securities and Exchange Commission Rule 3-16 of Regulation S-X (“Rule 3-16”) requires financial statements for each of the registrant’s affiliates whose securities constitute a substantial portion of the collateral for registered securities.  The common stock of GXS, Inc. is considered to constitute a substantial portion of the collateral for the registered notes.  Accordingly, the financial statements of GXS, Inc. would be required by Rule 3-16.  Management does not believe the GXS, Inc. financial statements would add meaningful disclosure and has not included those financial statements herein, because they are substantially identical to the GXS Worldwide, Inc. financial statements and the total assets, revenues, operating income, net income (loss) and cash flows of GXS, Inc. are expected to continue to constitute substantially all of the corresponding amounts for GXS Worldwide, Inc. and its subsidiaries.
 
 
3

 
 
PART I.     FINANCIAL INFORMATION

GXS WORLDWIDE, INC. AND SUBSIDIARIES
(In thousands, except share and per share amounts)
 
   
March 31,
2012
   
December 31,
2011
 
   
(Unaudited)
       
Assets
           
Current assets:
           
Cash and cash equivalents
  $ 28,736     $ 12,968  
Receivables, net
    100,728       106,799  
Prepaid expenses and other assets
    30,935       28,881  
Total current assets
    160,399       148,648  
                 
Property and equipment, net
    107,170       105,049  
Goodwill
    269,355       268,767  
Intangible assets, net
    115,728       120,483  
Deferred financing costs
    14,349       15,018  
Other assets
    22,645       23,112  
                 
Total Assets
  $ 689,646     $ 681,077  
                 
Liabilities and Stockholder's Deficit
               
Current liabilities:
               
Borrowings under revolving credit facility
  $ ––     $ 3,000  
Trade payables
    16,468       19,640  
Deferred income
    43,865       46,622  
Accrued expenses and other current liabilities
    64,797       47,369  
Total current liabilities
    125,130       116,631  
                 
Long-term debt
    772,860       772,068  
Deferred income tax liabilities
    10,305       9,961  
Other liabilities
    48,782       46,743  
Total liabilities
    957,077       945,403  
                 
GXS Worldwide, Inc. stockholder's deficit:
               
Common stock $1.00 par value, 1,000 shares authorized, issued and outstanding
    1       1  
Additional paid-in capital
    429,242       429,045  
Accumulated deficit
    (692,073 )     (687,446 )
Accumulated other comprehensive loss
    (4,888 )     (6,208 )
Total GXS Worldwide, Inc. stockholder's deficit
    (267,718 )     (264,608 )
Non-controlling interest
    287       282  
Total stockholder’s deficit
    (267,431 )     (264,326 )
                 
Total Liabilities and Stockholder’s Deficit
  $ 689,646     $ 681,077  


See accompanying notes to condensed consolidated financial statements (unaudited)
 
 
4

 
 
GXS WORLDWIDE, INC. AND SUBSIDIARIES
 (In thousands)
(Unaudited)
 
   
Three Months ended March 31,
 
   
2012
   
2011
 
             
Revenues
  $ 118,912     $ 114,108  
                 
Costs and operating expenses:
               
Cost of revenues
    64,750       62,629  
Sales and marketing
    17,150       15,459  
General and administrative
    18,447       18,210  
Restructuring charges
    381       201  
Operating income
    18,184       17,609  
                 
Other income (expense):
               
Interest expense, net
    (21,339 )     (20,949 )
Other income (expense), net
    (718 )     456  
Loss before income taxes
    (3,873 )     (2,884 )
                 
Income tax expense
    749       910  
Net loss
    (4,622 )     (3,794 )
Less:  Net income attributable to non-controlling interest
    5       10  
                 
Net loss attributable to GXS Worldwide, Inc.
  $ (4,627 )   $ (3,804 )


See accompanying notes to condensed consolidated financial statements (unaudited)
 
 
 
5

 
 
GXS WORLDWIDE, INC. AND SUBSIDIARIES
(In thousands)
(Unaudited)
 
   
Three Months ended March 31,
 
   
2012
   
2011
 
             
Net loss
  $ (4,622 )   $ (3,794 )
Foreign currency translation adjustments
    1,320       1,085  
                 
Comprehensive loss
    (3,302 )     (2,709 )
Less:  Comprehensive income attributable to non-controlling interest
    5       10  
                 
Comprehensive loss attributable to GXS Worldwide, Inc.
  $ (3,307 )   $ (2,719 )


See accompanying notes to condensed consolidated financial statements (unaudited)
 
 
6

 
 
GXS WORLDWIDE, INC. AND SUBSIDIARIES
(In thousands)
(Unaudited)


   
Common stock
   
Additional paid-in capital
   
Accumulated deficit
   
Accumulated other comprehensive loss
   
Non- controlling interest
   
Total
 
                                     
Balance at December 31, 2011
  $ 1     $ 429,045     $ (687,446 )   $ (6,208 )   $ 282     $ (264,326 )
                                                 
Net income (loss)
    ––       ––       (4,627 )     ––       5       (4,622 )
Stock compensation expense
    ––       197       ––       ––       ––       197  
Foreign currency translation adjustments
    ––       ––       ––       1,320       ––       1,320  
                                                 
Balance at March 31, 2012
  $ 1     $ 429,242     $ (692,073 )   $ (4,888 )   $ 287     $ (267,431 )

 
See accompanying notes to condensed consolidated financial statements (unaudited)
 
 
7

 
 
GXS WORLDWIDE, INC. AND SUBSIDIARIES
(In thousands)
(Unaudited)

   
Three Months ended March 31,
 
   
2012
   
2011
 
Cash flows from operations:
           
Net loss
  $ (4,622 )   $ (3,794 )
Adjustments to reconcile net loss to net cash provided by operating activities:
               
Depreciation and amortization
    13,863       12,922  
Deferred income taxes
    202       135  
Amortization of deferred financing costs and debt discount
    1,978       1,763  
Unrealized gain on interest rate swap
    ––       (2,365 )
Stock compensation expense
    197       209  
Changes in operating assets and liabilities, net of effect of business acquisitions:
               
(Increase) decrease in receivables
    6,071       (4,731 )
Increase in prepaid expenses and other assets
    (1,521 )     (4,376 )
Decrease in trade payables
    (2,980 )     (1,721 )
Increase (decrease) in deferred income
    (2,757 )     5,365  
Increase in accrued expenses and other liabilities
    19,373       19,544  
Other
    383       (296 )
Net cash provided by operating activities
    30,187       22,655  
                 
Cash flows from investing activities:
               
Purchases of property and equipment (including capitalized interest)
    (11,107 )     (10,790 )
Business acquisition, net of cash acquired ($4 for three months ended March 31, 2011)
    ––       (1,125 )
Net cash used in investing activities
    (11,107 )     (11,915 )
                 
Cash flows from financing activities:
               
Borrowings under revolving credit facility
    7,000       ––  
Repayments under revolving credit facility
    (10,000 )     (8,000 )
Payment of financing costs
    (400 )     (2 )
Net cash used in financing activities
    (3,400 )     (8,002 )
                 
Effect of exchange rate changes on cash
    88       341  
                 
Increase in cash and cash equivalents
    15,768       3,079  
Cash and cash equivalents, beginning of period
    12,968       16,326  
Cash and cash equivalents, end of period
  $ 28,736     $ 19,405  
                 
Supplemental disclosure of cash flow information:
               
Cash paid for interest, net of amounts capitalized
  $ 311     $ 298  
Cash paid for interest rate swap
  $ ––     $ 2,365  
Cash paid for income taxes
  $ 659     $ 669  
                 
Noncash investing and financing activities:
               
Fair value of equity securities issued in business acquisition
  $ ––     $ 420  


See accompanying notes to condensed consolidated financial statements (unaudited)
 
 
8

 
 
GXS WORLDWIDE, INC. AND SUBSIDIARIES
(In thousands, except per share amounts)
 
(1) 
Business and Basis of Presentation

GXS Worldwide, Inc. and its subsidiaries (“GXS Worldwide” or the “Company”) are primarily engaged in the business of providing transaction management infrastructure products and services that enable companies to electronically exchange essential business documents.  The Company’s services and solutions enable customers to manage mission critical supply chain functions and financial transactions related to the exchange of goods and services.  Customers and their trading partners do business together via GXS Trading Grid®, a globally-accessible, cloud-computing platform specifically designed for business-to-business (“B2B”) e-commerce.  The Company is a wholly-owned subsidiary of GXS Holdings, Inc. (“GXS Holdings”), its direct parent company, and is an indirect wholly-owned subsidiary of GXS Group, Inc. (“GXS Group”), the ultimate parent company.

On June 2, 2010, GXS Holdings acquired Inovis International, Inc. (“Inovis”), a provider of integrated B2B services and solutions that manage the flow of e-commerce information for global trading communities.  Following the transaction, Inovis was merged with and into GXS, Inc. (“GXSI”), an indirect wholly-owned subsidiary and a guarantor of the Company’s notes, and the Company became an indirect wholly-owned subsidiary of GXS Group (previously known as Griris Holding Company, Inc.).  Certain foreign subsidiaries of Inovis became wholly-owned subsidiaries of GXSI.  The results of operations for Inovis are included in the Company’s condensed consolidated results of operations since its acquisition on June 2, 2010.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information.  Accordingly, these financial statements do not include all of the information and notes required by U.S. GAAP for complete financial statements.  In the opinion of management, the unaudited condensed consolidated financial statements include all adjustments considered necessary for fair presentation of the financial position and results of operations.

Interim results for the three month period ended March 31, 2012 are not necessarily indicative of the results that may be expected for a full fiscal year.  For further information, refer to the consolidated financial statements and notes thereto for the year ended December 31, 2011, which are included in the Company’s Annual Report on Form 10-K, filed under the Securities Exchange Act of 1934 with the Securities and Exchange Commission (“SEC”) on March 19, 2012.

 
(2) 
Summary of Significant Accounting Policies

(a)  
Consolidation

The condensed consolidated financial statements represent the consolidation of all companies in which the Company directly or indirectly has a majority ownership interest and controls the operations.  All significant intercompany transactions and balances have been eliminated in consolidation.  Investments in companies in which the Company has an ownership interest of 50 percent or less but can exercise significant influence over the investee’s operations and policies are accounted for under the equity method of accounting.  The Company uses the cost method to account for investments where it holds less than a 20 percent ownership interest and where it cannot exercise significant influence over the investee’s operations and policies.  At the end of each reporting period, the Company assesses the fair value of its investments to determine if any impairment has occurred.  To the extent the Company’s carrying value exceeds the estimated fair value and the loss is considered to be other than a temporary decline, the Company records an impairment charge.

(b)  
Acquisition Accounting

Acquisitions are accounted for using the purchase method of accounting prescribed in Financial Accounting Standards (“FAS”) Codification 805 – Business Combinations.  Under this standard, assets and liabilities acquired are recorded at their fair values on the date of acquisition.  Certain long-lived assets recorded at their fair values including property and equipment, trade names, customer contracts and relationships or other identifiable intangible assets will result in additional depreciation and amortization expense after the acquisition.  The amount of depreciation and amortization will be based upon the assets’ fair values at date of acquisition and the estimated useful lives of the respective assets.  Following the acquisition, revenue and operating income are affected by a reduction of deferred revenue over its remaining term to reflect estimated fair value of the obligation which includes estimated cost to deliver and the associated margin.
 
 
9

 
 
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(In thousands, except per share amounts)
 
(c)
Foreign Currency

The financial statements of most subsidiaries located outside of the United States (“U.S.”) are measured using the local currency as the functional currency.  Assets and liabilities are translated at rates of exchange that approximate those at the balance sheet date.  Income and expense items are translated at average monthly rates of exchange.  The resulting translation gains and losses are included as a separate component of “accumulated other comprehensive loss” included in stockholder’s deficit.  Gains and losses from transactions in foreign currency are included in the condensed consolidated statements of operations within “other income (expense), net.”

(d)
Cash and Cash Equivalents

The Company considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents. Cash equivalents consist primarily of overnight interest bearing deposits.

(e)
Revenue Recognition

The Company has various service lines, specifically including:  Messaging Services, Managed Services, B2B Software Services, Data Synchronization, and Custom Outsourcing Services.  The Company’s service lines generate revenues from three principal sources:

Transaction Processing — The Company earns recurring transaction processing revenue from facilitating the exchange of business documents among its customers’ computer systems and those of their trading partners.  Such revenues are generally based on a per-transaction fee or monthly minimum charge and are recognized in the period in which the related transactions are processed.  Revenue on contracts with monthly, quarterly or annual minimum transaction levels are recognized based on the greater of actual transactions or the specified contract minimum amounts.

Professional Services — The Company earns professional services revenue generally pursuant to time and material contracts and in most instances revenue is recognized as the related services are provided, except when such services are associated with a new project implementation, in which case the associated revenue is deferred over the contract term as outlined below.

Software Licensing and Maintenance — The Company earns revenue from the licensing of software applications that facilitate and automate the exchange of information among disparate business systems and applications.  Such revenue is recognized when the license agreement is signed, the license fee is fixed and determinable, delivery has occurred, and collection is considered probable.  Revenue from licensing software that requires significant customization and modification or where services are otherwise considered essential to the functionality of the software are recognized using the percentage of completion method, based on the costs incurred in relation to the total estimated costs of the contract.  Revenue from hosted software applications is recognized ratably over the hosting period unless the customer has the contractual right to take possession of the software without significant penalty and it is feasible for the customer to use the software with its own hardware or contract with another party unrelated to the Company to host the software.  Software maintenance revenue is deferred and recognized on a straight-line basis over the life of the related maintenance period, which is typically one year.

Effective January 1, 2011, the Company adopted the provisions of Accounting Standards Update (“ASU”) 2009-13 – Revenue Arrangements with Multiple Deliverables, which requires companies to allocate the overall arrangement consideration to each deliverable by using a best estimate of the selling price of individual deliverables in the arrangement in the absence of vendor specific objective evidence (“VSOE”) or other third-party evidence of the selling price.  The Company identified no significant impact on its condensed consolidated results of operations and financial condition of adopting ASU 2009-13.  For non-software arrangements with more than one element of revenue with stand-alone value, the Company allocates revenue to each component based on VSOE, or third party evidence of selling price when available, or estimated selling price.  VSOE for software maintenance is based on contractual renewal rates.  Professional services are separately priced and are based on standard hourly rates determined by the nature of the service and the experience of the professional performing the service.

In certain arrangements, the Company sells transaction processing along with implementation and start-up services.  The implementation and start-up services typically do not have stand-alone value and, therefore, are not separated.  Revenues related to implementation and start-up services are recognized over the term of the related transaction processing arrangement.  In some arrangements, the Company also sells professional services which do have stand-alone value and can be separated from other elements in the arrangement.  The revenue related to these services is recognized as the service is performed.
 
 
10

 
 
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(In thousands, except per share amounts)
 
The Company also defers all direct and relevant costs associated with implementation of long-term customer contracts to the extent such costs can be recovered through guaranteed contract revenues.  The unamortized balance of these costs as of March 31, 2012 and December 31, 2011 was $27,782 and $26,445, respectively, and are recorded in either “prepaid expenses and other assets” (see Note 5) or “other assets” (see Note 8) in the condensed consolidated balance sheets, depending on the remaining duration of the underlying contracts.

(f)
Receivables and Concentration of Credit Risk

The Company provides products and services and extends credit to numerous customers in B2B e-commerce markets.  To the extent that the credit quality of customers deteriorates, the Company may have exposure to credit losses.  The Company monitors its exposure to credit losses and maintains allowances for anticipated losses.  The Company believes it has adequate allowances to cover its exposure.

The Company’s allowance for doubtful accounts is determined through specific identification of customers known to be doubtful of collection and an overall evaluation of the aging of its accounts receivable, and considers such factors as the likelihood of collection based upon an evaluation of the customer’s creditworthiness, the customer’s payment history and other conditions or circumstances that may affect the likelihood of payment, such as political and economic conditions in the country in which the customer is located.

(g)
Property and Equipment

Property and equipment are stated at cost.  Depreciation on computer equipment and software is calculated on straight-line and accelerated methods over the estimated useful lives of the assets of three to five years.  Leasehold improvements are amortized on a straight-line basis over the shorter of the lease term or estimated useful life of the asset.  Property and equipment includes costs related to the development of internal-use software.

(h)
Capitalized Software Costs

The Company capitalizes software development costs in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 350-40 – Accounting for the Costs of Computer Software Developed or Obtained for Internal-Use.  The Company begins to capitalize costs for software to be used internally when it enters the application development stage.  This occurs when the Company completes the preliminary project stage, management authorizes and commits to funding the project and it is feasible that the project will be completed and the software will perform the intended function.  The Company stops capitalizing costs related to a software project when it enters the post implementation and operation stage.  If different determinations are made with respect to the state of development that a software project had achieved, then the amount capitalized and the amount charged to expense for that project could differ materially.

Costs capitalized during the application development stage consist of payroll and related costs for employees who are directly associated with, and who devote time directly to, a project to develop software for internal-use.  The Company also capitalizes the direct costs of materials and services, which generally includes outside contractors, and interest.  The Company does not capitalize any general and administrative or overhead costs or costs incurred during the application development stage related to training or data conversion costs.  Costs related to upgrades and enhancements to internal-use software, if those upgrades and enhancements result in additional functionality, are capitalized.  If upgrades and enhancements do not result in additional functionality, those costs are expensed as incurred.  If different determinations are made with respect to whether upgrades or enhancements to software projects would result in additional functionality, then the amount capitalized and the amount charged to expense for that project could differ materially.

The Company begins to amortize capitalized costs with respect to development projects for internal-use software when the software is ready for use.  The capitalized software development costs are generally amortized using the straight-line method over a five-year period.  In determining and reassessing the estimated useful life over which the cost incurred for the software should be amortized, the Company considers the effects of obsolescence, technology, competition and other economic factors.  If different determinations are made with respect to the estimated useful lives of the software, the amount of amortization charged in a particular period could differ materially.

During the three months ended March 31, 2012 and 2011, the Company capitalized costs related to the development of internal-use software of $6,067 and $6,056, respectively.  Such amounts include capitalized interest of $150 and $286 for the three months ended March 31, 2012 and 2011, respectively.
 
 
11

 
 
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(In thousands, except per share amounts)
 
In accordance with FASB ASC 985-20 – Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed, the Company expenses costs incurred in the development of software sold externally or developed for license to customers until technological feasibility has been established under the working model method.  The Company does not capitalize costs since there is generally such a short period of time between the date technological feasibility is achieved and the date when the product is available for general release to customers, thus any costs incurred have not been material to date.

(i) 
Goodwill

As of March 31, 2012 and December 31, 2011, the Company had goodwill in the amount of $269,355 and $268,767, respectively.  The Company historically tests goodwill and intangible assets with indefinite useful lives for impairment at least annually or whenever there is a change in events or circumstances which may indicate impairment.  The impairment test involves two steps.  In the first step, the Company compares the carrying value of the reporting unit which holds the goodwill with the fair value of the reporting unit.  If the carrying value is less than the fair value, there is no impairment.  If the carrying value exceeds the fair value of the reporting unit, step two is performed to measure the impairment loss.

In December 2010, the FASB issued ASU 2010-28 – Intangibles – Goodwill and Other (Topic 350) (previously Emerging Issues Task Force (“EITF”) Issue No. 10-A – When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts).  ASU 2010-28 requires companies that are performing their goodwill impairment testing (either on an annual or interim basis) and have identified a reporting unit with a zero or negative carrying value of equity during step one of the test, to perform step two of the goodwill impairment test and determine if it is more likely than not that a goodwill impairment exists.  ASU 2010-28 became effective prospectively for public entities whose fiscal years, and interim period within those years, began after December 15, 2010.

In September 2011, the FASB issued ASU 2011-08 – Intangibles – Goodwill and Other (Topic 350):  Testing Goodwill for Impairment, which is intended to simplify how an entity is required to test goodwill for impairment under ASU 2010-28 by allowing an entity to first assess qualitative factors (which are defined in the new guidance) to determine whether it is necessary to perform the two-step quantitative goodwill impairment test.  The Company adopted ASU 2011-08 on January 1, 2012, as required.

As of March 31, 2012, the Company assessed the qualitative factors (as defined in ASU 2011-08) and determined that goodwill was not impaired; as it was more likely than not that the fair value was greater than the carrying amount.  As of December 31, 2011, the Company completed impairment testing (including performing the required step-two test) and determined that goodwill was not impaired.  The Company’s assessment and impairment test are based on a single operating segment and reporting unit structure.  The fair value of the reporting unit significantly exceeded the carrying value at March 31, 2012 and December 31, 2011.

(j)
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of

The Company reviews long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to undiscounted future net cash flows expected to be generated by the asset.  If the carrying amount of an asset is not deemed to be recoverable, the impairment to be recognized is the extent by which the carrying amount of the asset exceeds the fair value of the asset less selling costs.  Assets to be disposed of are reported at the lower of the carrying amount or fair value less selling costs.

(k)
Restructuring

The Company calculates the facility charge included in the restructuring charges by discounting the net future cash obligation of the existing leases less anticipated rental receipts to be received from existing and potential subleases.  This requires significant judgment about the length of time the space will remain vacant, anticipated cost escalators and operating costs associated with the leases, the market rate at which the space will be subleased, and broker fees or other costs necessary to market the space.  These judgments are based upon independent market analysis and assessment from experienced real estate brokers.  If the Company were to make different determinations with respect to these factors the amounts of restructuring charges could differ materially, although most of the vacant space has been sublet with the sublease of the Company’s former corporate headquarters.
 
 
12

 
 
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(In thousands, except per share amounts)
 
(l)
Contingencies

The Company periodically records the estimated impacts of various conditions, situations or circumstances involving uncertain outcomes.  These events are called contingencies, and the accounting for these events is prescribed by FASB ASC 450 – Accounting for Contingencies.  This standard defines a contingency as an existing condition, situation, or set of circumstances involving uncertainty as to possible gain or loss to an enterprise that will ultimately be resolved when one or more future events occur or fail to occur.  Contingent losses must be accrued if:

 
·  
information is available that indicates it is probable that the loss has been incurred, given the likelihood of the uncertain future events; and
 
 
·  
the amount of the loss can be reasonably estimated.

The accrual of a contingency involves considerable judgment on the part of management.  Legal proceedings have elements of uncertainty, and in order to determine the amount of accrued liabilities required, if any, the Company assesses the likelihood of any adverse judgments or outcomes to pending and threatened legal matters, as well as the best estimate of or potential ranges of amounts of probable losses.  The Company uses internal expertise and outside experts, as necessary, to help estimate the probability that a loss has been incurred and the amount or range of the loss.  A determination of the amount of accrued liabilities required for these contingencies is made after analysis of each individual issue.  The required accrued liabilities may change in the future due to new developments in each matter or changes in approach such as a change in settlement strategy.

(m)
Comprehensive Loss

Comprehensive loss consists of net income (loss) adjusted for increases and decreases affecting accumulated other comprehensive loss in stockholder’s deficit that are excluded from the determination of net income (loss).

Accumulated other comprehensive loss was comprised of the following:

   
March 31,
2012
   
December 31,
2011
 
Additional minimum pension liability
  $ (461 )   $ (461 )
Foreign currency translation adjustments
    (4,427 )     (5,747 )
Accumulated other comprehensive loss
  $ (4,888 )   $ (6,208 )

(n)
Research and Development

Research and development costs are expensed as incurred.  Research and development costs are reflected within cost of revenues in the condensed consolidated results of operations for the three months ended March 31, 2012 and 2011.

(o)
Income Taxes

Income taxes are accounted for under the asset and liability method.  Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards.  Deferred tax assets and liabilities are measured using enacted tax rates at the time they are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.  Income tax liabilities are recorded for the impact of positions taken on income tax returns which management believes are not more likely than not to be sustained on tax audit.  Interest expense accrued on such unrecognized tax benefits and income tax penalties are recognized through income tax expense.

The expected effective income tax rate for the three months ended March 31, 2012 and 2011 differs from the federal statutory rate of 35% principally as a result of state income taxes, differing rates in foreign jurisdictions and the effect of expected losses in the U.S. and foreign jurisdictions for which no income tax benefit has been recognized.
 
 
13

 
 
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(In thousands, except per share amounts)
 
(p)
Derivative Instruments

Derivative instruments are recognized in the condensed consolidated balance sheets at their fair value and changes in the fair value are recognized in income, unless the derivatives qualify as hedges of future cash flows.  For derivatives qualifying as hedges of future cash flows, the effective portion of any changes in fair value is recorded temporarily in equity, and then recognized in income along with the related effects of the hedged items.  Any ineffective portion of hedges is reported in income as it occurs.

The Company considered the interest rate swap, which expired and was settled on April 26, 2011, to be included within Level 2 of the fair value hierarchy established by U.S. GAAP, as its fair value is measured primarily utilizing observable market-based inputs.

(q)
Fair Value of Financial Instruments

The Company’s financial instruments consist principally of cash and cash equivalents, receivables, long-term debt and the interest rate swap.  Generally, the carrying amounts of current assets and liabilities approximate fair value because of the short-term maturity of these instruments.  At March 31, 2012, the Company’s long-term debt was trading at 97.50% of its face value or book value, so the Company considered the fair value to be $765,375 at that date.  At December 31, 2011, the Company’s long-term debt was trading at 92.63% of its face value or book value, so the Company considered the fair value to be $727,146 at that date.  The fair value of the Company’s interest rate swap, which expired and was settled on April 26, 2011, is discussed further in Note 12.

The Company considered the long-term debt to be included within Level 2 of the fair value hierarchy established by U.S. GAAP, as its fair value is measured primarily utilizing observable market-based inputs, such as quotes of recent market trades of its debt.

(r)
Stock Option Plans

GXS Holdings sponsors a stock option plan (the GXS Holdings, Inc. Stock Incentive Plan or “Holdings Plan”) that provides for the grant of stock options and certain other types of stock-based compensation awards to employees, directors and consultants of the Company.  The Holdings Plan provided for the grant of awards to acquire up to 18,836 shares of GXS Holdings common stock.  Effective with the Inovis Merger in June 2010, shares reserved and granted under the Holdings Plan were subject to a conversion into shares and grants in GXS Group at a conversion rate of approximately 18 to 1 and remain outstanding with their existing vesting schedules, expiration dates and subject to other terms of the Holdings Plan, which GXS Group assumed upon the Merger.  The conversion reduced the total authorized number of Holdings Plan options that could be awarded from 18,836 shares to 1,055 shares.  However, no additional award grants will be made from this plan; therefore the maximum number of plan options in the pool will equal the number of options outstanding at the end of a measurement period.

Also in connection with the Inovis Merger, the Company established the 2010 GXS Group, Inc. Long-Term Incentive Plan (“Group LTIP”) in July 2010 that provides for the grant of stock options and certain other types of stock-based compensation awards to employees, directors and consultants of the Company.  The Group LTIP, as amended in May 2012, provides for the grant of awards to acquire up to 17,500 shares of GXS Group common stock and all of the Company’s stock option awards subsequent to July 2010 are being granted through the Group LTIP.

Compensation costs relating to share-based payment transactions are recognized in the condensed consolidated statements of operations over the applicable service period based upon the fair value of the award at the grant date.  Fair value is determined in accordance with FASB ASC Topic 718 – Accounting for Stock Options and Other Stock-Based Compensation.

(s)
Use of Estimates

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management of the Company to make estimates and assumptions that affect the amounts reported and related disclosures.  Additionally, estimates were used when recording the fair value of assets acquired and liabilities assumed in acquisitions.  Estimates, by their nature, are based on judgment and available information.  Actual results could differ materially from those estimates.

Significant estimates used in preparing the condensed consolidated financial statements include:  recovery of long-lived assets; useful lives of amortizable intangible assets; valuation of goodwill, deferred tax assets and receivables; and determination of amounts of cost deferrals, tax reserves, deferred tax assets and liabilities, accrued liabilities, and pension liabilities.  In addition, estimates are required to recognize revenue for software and other arrangements with multiple deliverables and to assess the stage at which software development costs should be capitalized.
 
 
14

 
 
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(In thousands, except per share amounts)
 
(t)
Reclassifications

Certain reclassifications have been made to the condensed consolidated financial statements as of December 31, 2011 and for the three months ended March 31, 2011 to conform to the presentation at March 31, 2012 and for the three months then ended.


(3) 
Acquisitions

RollStream, Inc.

On March 28, 2011, GXS Group acquired all of the capital stock of RollStream, Inc. (“RollStream”), a software-as-a-service (“SaaS”) provider of enterprise community management solutions, for total consideration of $1,549, including cash of $1,129 and shares of GXS Group common and preferred stock with a combined fair value of $420, paid to the RollStream stockholders.  The fair value of the stock issued was pushed down to the Company.

The acquisition was accounted for using the purchase method of accounting prescribed in FAS Codification 805 – Business Combinations.  Under this standard, acquired assets and liabilities are recorded at their fair values on the date of acquisition.  The application of purchase accounting for the transaction resulted in a value of $1,549, which was pushed down to the Company.

The impact of the RollStream acquisition on the Company’s condensed consolidated results of operations and financial condition is immaterial and, therefore, pro forma financial information is not provided.

Inovis International, Inc.

On June 2, 2010, GXS Holdings acquired all the capital stock of Inovis for total consideration of $303,250, including cash of $129,782 paid to retire the outstanding debt of Inovis and cash of $104,663 paid to the Inovis stockholders (the “Inovis Merger” or the “Merger”).  The Inovis stockholders also received shares of common and preferred stock with a fair value of $68,805, as determined by an independent third-party valuation services firm, in GXS Group, which owns all of the capital stock of GXS Holdings, resulting in Inovis stockholders having an approximate 28.1% ownership interest in GXS Group following consummation of the Merger.

Inovis was a provider of integrated B2B services and solutions that manage the flow of e-commerce information for global trading communities.  The Merger expanded the Company’s customer base in the U.S., Canada and the United Kingdom (“U.K”.), broadened its product offerings and increased the functionality of its Managed Services offering.

The Merger was accounted for using the purchase method of accounting prescribed in FAS Codification 805 – Business Combinations.  Under this standard, acquired assets and liabilities are recorded at their fair values on the date of acquisition.  The application of purchase accounting for the transaction resulted in a value of $303,250, which was pushed down to the Company.

Interchange Serviços S.A.

On December 30, 2008, GXS Tecnologia da Informação (Brasil) Ltda., the Company’s wholly owned subsidiary in Brazil, acquired all of the capital stock of Interchange Serviços S.A. (“Interchange”) for $19,772.  Interchange was a provider of electronic data interchange and related services to customers located in Brazil.  The Company acquired Interchange to expand the Company’s presence in Brazil and enable it to offer additional integration opportunities to global businesses seeking to expand their operations in Latin America.

During due diligence in 2008, the Company identified a pre-acquisition tax contingency for which the sellers have provided a full indemnification and which the Company believes can be enforced and recovered if needed.  The Company originally accrued an estimated liability of $11,278 upon acquisition and recorded an equal amount as a receivable from the seller, which was classified as an “other receivable” within receivables, net.  The amount of the accrued liability and corresponding indemnification receivable are adjusted each period to reflect the current exchange rates and the periodic expiration of the statute of limitations with respect to certain tax years within the contingency.  As of March 31, 2012 and December 31, 2011 the remaining estimated liability and corresponding indemnification receivable were $2,167 and $2,116, respectively, and continue to be reflected in both “accrued expenses and other current liabilities” (see Note 9) and “other receivables” (see Note 4) in the condensed consolidated balance sheets.
 
 
15

 
 
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(In thousands, except per share amounts)
 
(4) 
Revenues and Receivables

The Company operates as a single operating segment and provides products and services to its business customers around the world, both directly, through its foreign subsidiaries, and indirectly through resellers.

Receivables, net were comprised of the following:

   
March 31,
2012
   
December 31, 2011
 
Trade accounts receivable
  $ 102,355     $ 108,289  
Unbilled receivables
    5,511       5,434  
Other receivables
    7,829       7,827  
    Subtotal
    115,695       121,550  
Less:  allowance for doubtful accounts
    (14,967 )     (14,751 )
    Total receivables, net
  $ 100,728     $ 106,799  

Unbilled receivables represent amounts earned and accrued as receivables from customers prior to the end of the period.  Unbilled receivables are expected to be billed and collected within twelve months of the respective balance sheet date.  Other receivables include various value added tax receivables and the indemnification receivable associated with the Interchange tax contingency of $2,167 and $2,116 at March 31, 2012 and December 31, 2011, respectively.  See Note 3 for further discussion of the Interchange transaction.


(5) 
Prepaid Expenses and Other Assets

Prepaid expenses and other assets (a current asset) were comprised of the following:

   
March 31,
2012
   
December 31,
2011
 
Prepaid expenses
  $ 14,861     $ 13,886  
Deferred income tax assets, current
    5,360       5,294  
Deferred direct and relevant costs on implementations of contracts, current
    9,485       9,085  
Other
    1,229       616  
    Total
  $ 30,935     $ 28,881  


(6)  
Property and Equipment

Property and equipment, net were comprised of the following:

   
March 31,
2012
   
December 31,
2011
 
Computer equipment and furniture
  $ 203,785     $ 200,542  
Computer software
    334,614       327,388  
Leasehold improvements
    17,553       17,533  
    Gross property and equipment
    555,952       545,463  
Less:  accumulated depreciation and amortization
    (448,782 )     (440,414 )
    Property and equipment, net
  $ 107,170     $ 105,049  

Depreciation and amortization expense related to property and equipment was $8,874 and $7,435 for the three months ended March 31, 2012 and 2011, respectively.
 
 
16

 
 
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(In thousands, except per share amounts)
 
(7)  
Goodwill and Other Acquired Intangible Assets

The following represents a summary of changes in goodwill for the three months ended March 31, 2012:

Balance as of December 31, 2011
  $ 268,767  
Foreign currency translation
    588  
Balance as of March 31, 2012
  $ 269,355  

Other acquired intangible assets were comprised of the following:

March 31, 2012
 
Gross Carrying Amount
   
Accumulated Amortization
   
Net
 
Amortizable intangible assets:
                 
  Customer relationships
  $ 221,276     $ (125,236 )   $ 96,040  
  Product technology
    18,479       (3,807 )     14,672  
  Trade names and trademarks
    4,368       (1,590 )     2,778  
  Other acquired intangible assets
    3,464       (2,927 )     537  
      Subtotal
    247,587       (133,560 )     114,027  
Non-amortizable intangible assets:
                       
  Trade names and trademarks
    1,701       ––       1,701  
      Total
  $ 249,288     $ (133,560 )   $ 115,728  
                         
December 31, 2011
 
Gross Carrying Amount
   
Accumulated Amortization
   
Net
 
Amortizable intangible assets:
                       
  Customer relationships
  $ 221,001     $ (120,944 )   $ 100,057  
  Product technology
    18,445       (3,273 )     15,172  
  Trade names and trademarks
    4,368       (1,372 )     2,996  
  Other acquired intangible assets
    3,428       (2,833 )     595  
      Subtotal
    247,242       (128,422 )     118,820  
Non-amortizable intangible assets:
                       
  Trade names and trademarks
    1,663       ––       1,663  
      Total
  $ 248,905     $ (128,422 )   $ 120,483  

The gross carrying amounts of certain intangible assets are impacted by certain balances being denominated in foreign currencies.  These balances are translated into U.S. dollars at the exchange rate in effect at the balance sheet date.

Intangible assets, except for those with an indefinite life, are amortized over their estimated useful lives using a method that reflects the pattern in which the economic benefits of the intangible assets are expected to be consumed or on a straight-line basis.  Amortization expense related to intangible assets was $4,989 and $5,487 for the three months ended March 31, 2012 and 2011, respectively.


(8)  
Other Assets

Other assets (a non-current asset) were comprised of the following:

   
March 31,
2012
   
December 31,
2011
 
Deferred direct and relevant costs on implementations of long-term contracts, net
  $ 18,297     $ 17,360  
Refundable deposits
    2,536       2,709  
Other
    1,812       3,043  
    Total
  $ 22,645     $ 23,112  
 
 
17

 
 
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(In thousands, except per share amounts)
(9)  
Accrued Expenses and Other Liabilities

Accrued expenses and other current liabilities were comprised of the following:

   
March 31,
2012
   
December 31,
2011
 
Accrued interest
  $ 22,644     $ 3,499  
Employee compensation and benefits
    16,060       18,577  
Other non-income taxes accrued
    10,110       10,496  
Restructuring
    3,417       3,394  
Estimated Interchange pre-acquisition tax contingency
    2,167       2,116  
Other
    10,399       9,287  
    Total
  $ 64,797     $ 47,369  


(10)  
Other Liabilities

Other liabilities (a non-current liability) were comprised of the following:

   
March 31,
2012
   
December 31,
2011
 
Pension and related benefits
  $ 19,120     $ 18,524  
Deferred income – non-current
    11,189       9,840  
Deferred rent – non-current
    11,000       10,520  
Rebates due to stockholders of Interchange, net of discount
    3,388       3,082  
Restructuring – non-current
    2,641       3,186  
Other
    1,444       1,591  
    Total
  $ 48,782     $ 46,743  


(11)  
Debt

Debt was comprised of the following:

   
March 31, 2012
   
December 31, 2011
 
   
Book Value
   
Fair Value
   
Book Value
   
Fair Value
 
Revolving credit facility
  $ ––     $ ––     $ 3,000     $ 3,000  
Senior secured notes
    785,000       765,375       785,000       727,146  
Less:  unamortized original issue discount
    (12,140 )     ––       (12,932 )     ––  
Total debt
    772,860       765,375       775,068       730,146  
Less:  current maturities of long-term debt
    ––       ––       (3,000 )     (3,000 )
Total long-term debt
  $ 772,860     $ 765,375     $ 772,068     $ 727,146  

At March 31, 2012, the Company’s long-term debt was trading at 97.50% of its face value or book value, so the Company considered the fair value to be $765,375 at that date.  At December 31, 2011, the Company’s long-term debt was trading at 92.63% of its face value or book value, so the Company considered the fair value to be $727,146 at that date.

Senior Secured Notes

On December 23, 2009, the Company issued $785,000 of senior secured notes (the “Senior Secured Notes”) with an original issue discount of $18,608.  The Senior Secured Notes bear interest at an annual rate of 9.75%, with interest payable on June 15 and December 15 each year.  The Senior Secured Notes mature on June 15, 2015 and are guaranteed on a senior secured basis by all of the Company’s existing and future wholly-owned domestic subsidiaries and all other domestic subsidiaries that guarantee the Company’s other indebtedness; and in certain circumstances are secured by an interest granted on substantially all of the Company’s properties and assets.  The Senior Secured Notes contain covenants that, among other things, restrict the Company’s ability to pay dividends,
 
 
18

 
 
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(In thousands, except per share amounts)
 
redeem stock, make certain distributions, payments or investments, incur indebtedness, create liens on the collateral, merge, consolidate or sell assets, and enter into transactions with affiliates.

Revolving Credit Facility

On December 23, 2009, the Company entered into a Credit and Guaranty Agreement which provides the Company with a $50,000 revolving credit facility (“the Revolver”).  Prior to the amendment of the Credit and Guaranty Agreement described below, the interest rate for the Revolver was a predetermined amount above the LIBOR, subject to a floor of 2.0%, or at a predetermined amount above the administrative agent’s “base rate”, subject to a floor of 3.0%, at the Company’s option.  The Revolver is guaranteed by the guarantors that guarantee the Senior Secured Notes and secured by collateral that secures the Senior Secured Notes.  The Revolver is used by the Company to, among other things, fund its working capital needs, support letters of credit and for general corporate purposes.  The Company’s ability to borrow additional monies in the future under the Revolver is subject to certain conditions, including compliance with certain covenants.

On February 29, 2012, the Credit and Guaranty Agreement was amended as follows:  (i) the expiration date of the Revolver was extended from December 23, 2012 to March 15, 2015; (ii) the minimum interest rate “floor” associated with the “base rate” and LIBOR was eliminated; (iii) the applicable margin was reduced with respect to Eurodollar rate loans to 4.50% per annum and with respect to “base rate” loans to 3.50% per annum; (iv) the revolving commitment fee percentage was lowered to 0.50% per annum; and (v) the net leverage ratio covenant was increased to a maximum of 5.75:1 commencing with the fiscal quarter ending March 31, 2012 and for each fiscal quarter ending thereafter.  All other covenants and conditions are unchanged.  The Company paid a closing fee of $375 and professional fees of $46 in connection with this amendment.

In accordance with ASC 470-50 Debt - Modifications and Extinguishments (“ASC 470-50”), the Company accounted for the Revolver amendment by deferring the $421 of direct costs associated with the amendment, combined with the existing unamortized deferred costs of $1,059 from the original agreement, and amortizing the total over the new term of the agreement.

As of March 31, 2012, the Company had outstanding letters of credit of $11,661, no outstanding borrowings, and additional available borrowings of $38,339 under the Revolver.  Any outstanding borrowings against the Revolver shall be repaid in full on March 15, 2015 and the commitments shall terminate on that date.  The Revolver requires the Company to maintain certain financial and nonfinancial covenants.  Noncompliance with any covenant specified in the Credit and Guaranty Agreement would qualify as an event of default whereby the lenders would have rights to call all outstanding borrowings due and payable.  At March 31, 2012, the Company was in compliance with all financial and non-financial covenants.

Other Information

The Company expects that cash flows from foreign operations will be required to meet its domestic debt service requirements.  However, there is no assurance that the foreign subsidiaries will generate sufficient cash flow or that the laws in foreign jurisdictions will not change to limit the Company’s ability to repatriate these cash flows or increase the tax burden on the collections.

 Deferred financing costs are being amortized over the life of the debt using a method that approximates the interest method. Amortization expense related to the deferred financing costs on the Senior Secured Notes and Revolver was $1,091 and $1,025 for the three months ended March 31, 2012 and 2011, respectively.


(12)  
Financial Instruments

Until April 2011, the Company had an interest rate swap agreement with a commercial bank with a notional amount of $255,000.  The provisions of the agreement provided that the Company would pay the counterparty a fixed rate of 3.86%.  The counterparty would pay the Company a variable rate equal to three-month LIBOR, which was 0.30% at March 31, 2011, just prior to the swap agreement’s expiration.  The fair value of the interest rate swap was $2,318 as of March 31, 2011 and was recorded in accrued expenses and other current liabilities in the condensed consolidated balance sheet at March 31, 2011.  The change in fair value of the interest rate swap of $2,365 was recorded as a reduction to interest expense for the three months ended March 31, 2011.  The interest rate swap agreement expired on April 26, 2011 and was settled with the commercial bank with a final payment of $2,318 having been made on that date.
 
 
19

 
 
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(In thousands, except per share amounts)
 
(13)  
Restructuring Charges

During the past several years, the Company has undertaken a series of restructuring activities, which included closing or consolidating certain office facilities and terminating employees, in order to reduce expenses in response to changing business requirements.  The restructuring charges reflect the total estimated net costs of these activities and current period adjustments of revised estimates associated with these restructuring plans.

During the three months ended March 31, 2012, the Company recorded restructuring charges of approximately $381, which included charges associated with the further consolidation of office space and involuntary termination of six employees.

The restructuring accrual amounts recorded are net of amounts the Company expects to receive from subleasing vacated space, primarily at its previous corporate headquarters through April 2014.  The facility charge was determined by discounting the net future cash obligation of the existing lease less anticipated rental receipts to be received from existing and potential subleases.  As of March 31, 2012, approximately $5,067 of the facilities restructuring obligations are associated with the Company’s previous global headquarters.  The Company relocated to its current global headquarters facility in March 2010.

The changes in the restructuring accrual for the three months ended March 31, 2012 are as follows:

   
Severance
   
Facilities
   
Total
 
                   
Balance as of December 31, 2011
  $ 488     $ 6,092     $ 6,580  
Restructuring charges
    278       103       381  
Payments and other adjustments
    (316 )     (587 )     (903 )
                         
Balance as of March 31, 2012
  $ 450     $ 5,608     $ 6,058  

The current portion of the above obligations totaled $3,417 and $3,394 at March 31, 2012 and December 31, 2011, respectively, and are included in “accrued expenses and other current liabilities” on the condensed consolidated balance sheets (see Note 9).  The long-term portion of the above obligations totaled $2,641 and $3,186 at March 31, 2012 and December 31, 2011, respectively, and are included in “other liabilities” on the condensed consolidated balance sheets (see Note 10).


(14) 
Contingencies

The Company is subject to various legal proceedings and claims in the U.S. and other foreign jurisdictions, which arise in the ordinary course of its business, none of which management believes are likely to have a material adverse effect on the Company’s condensed consolidated financial position or results of operations.

In 2006, Inovis became aware of patent infringement allegations by a third party against certain customers of one of Inovis’ software technology products.  In July 2007, Inovis filed a complaint for declaratory judgment against the third party in the U.S. District Court of Delaware, seeking a judgment and declaration that neither Inovis nor any of its customers have infringed on the patent at issue.  Inovis filed a Request for Reexamination of such patent with the U.S. Patent and Trademark Office (“the USPTO”), which was accepted in May 2008, resulting in the amendment and/or cancellation of certain of the patent claims.  In September 2009, the USPTO granted a second Request for Reexamination of the patent filed by Inovis, finding a substantial new question of patentability with respect to all claims.  In March 2010, the USPTO issued an initial ruling rejecting all of the claims in the patent, in response to which the patent holder filed amended claims.  In December 2010, the USPTO issued a final ruling cancelling certain of the patent claims and leaving only one amended claim and its dependent claims.  The litigation is currently stayed, but may resume in 2012, or later.  Although the Company believes that the third party’s patent infringement allegations are without merit, there can be no assurance that the Company will prevail in the litigation.  An amount of potential loss, if any, cannot be determined at this time.
 
The Company is also subject to income and other taxes in the U.S. and other foreign jurisdictions and is regularly under audit by tax authorities.  Although the Company believes its tax estimates are reasonable, the final determination of any tax audits and related litigation or other proceedings could be materially different than that which is reflected in the Company’s tax provisions and accruals.  In certain foreign jurisdictions, the Company may be required to place on deposit or provide a bank guarantee for amounts claimed by tax authorities while it challenges such amounts.  Should additional taxes be assessed as a result of an audit or following an unsuccessful challenge by the Company through litigation, it could have a material effect on the Company’s financial position and results of operations in the period or periods for which that determination is made.  Such a bank guarantee totaling $3,325 was made
 
 
20

 
 
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(In thousands, except per share amounts)
 
in May 2012 for a disputed tax matter in Brazil by the Company’s subsidiary, GXS Tecnologia da Informacao (Brasil) Ltda. (“GXS Brazil”), in connection with GXS Brazil’s judicial appeal of a tax claim by the municipality of Sao Paulo, Brazil in the approximate amount of $2,500 as of March 31, 2012.  The bank guarantee was collateralized by a deposit of cash with the issuing bank.  The Company believes that the position of the Brazilian tax authorities is not consistent with the relevant facts; however, there can be no assurance that the Company will ultimately prevail and it is likely that the bank guarantee, and supporting cash collateral, will remain in place for several years while GXS Brazil pursues the appeal of the tax claim in the courts.  While based on information available on the case and other similar matters provided by local counsel, the Company believes the facts support its position that an unfavorable outcome is not probable and no tax is owed, the ultimate outcome of this matter could result in a loss of up to the claim amount discussed above plus any future interest or penalties that may accrue.
 
The Company’s Indian subsidiary, GXS India Technology Centre Private Limited (“GXS India”), is subject to potential assessments by Indian tax authorities in the district of Bangalore.  U.S. and Indian transfer pricing regulations require that any international transaction involving associated enterprises be at arms-length prices.  Accordingly, the Company determines the pricing for such transactions on the basis of detailed functional and economic analysis involving benchmarking against similar transactions among entities that are not under common control.  If the applicable tax authorities determine that the transfer price applied was not appropriate, the Company may incur an increased tax liability, including accrued interest and penalties.  GXS India has received assessment orders from the Indian tax authorities alleging that the transfer price applied to intercompany transactions was not appropriate.  Based on advice from its tax advisors, the Company believes that the facts the Indian tax authorities are using to support their assessment are incorrect.  The Company has started appeal procedures and anticipates a settlement with the tax authorities.  The Company has accrued $1,494 to cover its anticipated financial exposure in this matter.  There can be no assurance that appeals will be successful or that these appeals will be finally resolved in the near future.  There is a possibility that the Company may receive similar orders for other years until the above disputes are resolved.


(15) 
Related Party Transactions

In conjunction with the Inovis Merger on June 2, 2010, the Company entered into an amended management agreement pursuant to which the Company agreed to pay in the aggregate an annual fee of $4,000 to Francisco Partners, the controlling shareholder of GXS Holdings, and certain former stockholders of Inovis, Golden Gate Capital (“Golden Gate”) and Cerberus Partners (“Cerberus”), in exchange for financial advisory and consulting services (the “Management Agreement”).  The Management Agreement has a term of ten years and the annual fee is allocated to Francisco Partners, Golden Gate and Cerberus in the annual amounts of $2,868, $566, and $566, respectively. 

The expense accrued for in each of the three month periods ended March 31, 2012 and 2011 was $1,000.  As of March 31, 2012 and December 31, 2011, the Company owed an aggregate of $2,415 and $1,415, respectively, for unpaid management fees earned under the Management Agreement through that date.  These unpaid fees are included in “accrued expenses and other current liabilities” in the condensed consolidated balance sheets.
 
In November 2011, the Company entered into an agreement with a director of the Company to provide consulting services for operational and technology reviews and assessments, as requested by the Company.  The Company considered the director’s experience as a former chief information officer of several public companies to be invaluable in providing useful analysis and feedback.  The agreement covered the period commencing November 15, 2011 through February 28, 2012 and, in accordance with the agreement, the consulting services were completed prior to the end of the first quarter of 2012.  In exchange for the consulting services, the director received a fee of $10 per week during which services are provided, plus reimbursement for any actual and reasonable expenses incurred in performing such services.  During the three months ended March 31, 2012, the Company recorded $50 for services provided under this agreement, plus approximately $4 for expenses incurred.

(16) 
Supplemental Condensed Consolidated Financial Information

The Senior Secured Notes are guaranteed by each of the Company’s U.S. subsidiaries (the “Subsidiary Guarantors”).  The guarantees are full, unconditional and joint and several.  The Subsidiary Guarantors are each wholly-owned by the Company.  The ability of the Company’s subsidiaries to make cash distributions and loans to the Company and its Subsidiary Guarantors is not expected to be significantly restricted.  The following supplemental financial information sets forth, on a consolidating basis, balance sheets, statements of operations and comprehensive income (loss), and statements of cash flows for the Company, its Subsidiary Guarantors and the Company’s non-guarantor subsidiaries.
 
 
21

 
 
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Condensed Consolidating Balance Sheets
December 31, 2011
(In thousands)
 
   
Parent
   
Guarantors
   
Non-Guarantors
   
Eliminations
   
Consolidated
 
Assets
                             
Current assets:
                             
Cash and cash equivalents
  $ ––     $ 2,836     $ 10,132     $ ––     $ 12,968  
Receivables, net
    ––       57,294       49,505       ––       106,799  
Prepaid expenses and other assets
    ––       16,887       11,994       ––       28,881  
Advances to subsidiaries
    ––       644,162       81,680       (725,842 )     ––  
Total current assets
    ––       721,179       153,311       (725,842 )     148,648  
                                         
Investments in subsidiaries
    499,003       18,098       ––       (517,101 )     ––  
Property and equipment, net
    ––       97,204       7,845       ––       105,049  
Goodwill
    ––       242,198       26,569       ––       268,767  
Intangible assets, net
    ––       106,404       14,079       ––       120,483  
Deferred financing costs
    15,018       ––       ––       ––       15,018  
Other noncurrent assets
    ––       13,081       10,031       ––       23,112  
                                         
Total Assets
  $ 514,021     $ 1,198,164     $ 211,835     $ (1,242,943 )   $ 681,077  
                                         
Liabilities and Stockholder’s Equity (Deficit)
                                       
Current liabilities:
                                       
Current maturities of long-term debt
  $ 3,000     $ ––     $ ––     $ ––     $ 3,000  
Trade payables
    61       13,910       5,669       ––       19,640  
Other current liabilities
    3,500       50,165       40,326       ––       93,991  
Advances from affiliates
    ––       602,517       123,325       (725,842 )     ––  
Total current liabilities
    6,561       666,592       169,320       (725,842 )     116,631  
                                         
Long-term debt less current maturities
    772,068       ––       ––       ––       772,068  
Other liabilities
    ––       32,569       24,135       ––       56,704  
Total liabilities
    778,629       699,161       193,455       (725,842 )     945,403  
Stockholder’s equity (deficit):
                                       
Stockholder’s equity (deficit) GXS Worldwide, Inc.
    (264,608 )     499,003       18,098       (517,101 )     (264,608 )
Non-controlling interest
    ––       ––       282       ––       282  
Total stockholder’s equity (deficit)
    (264,608 )     499,003       18,380       (517,101 )     (264,326 )
                                         
Total Liabilities and Stockholder’s Equity (Deficit)
  $ 514,021     $ 1,198,164     $ 211,835     $ (1,242,943 )   $ 681,077  
 
 
22

 
 
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Condensed Consolidating Balance Sheets
March 31, 2012
(In thousands)
(Unaudited)
 
   
Parent
   
Guarantors
   
Non-Guarantors
   
Eliminations
   
Consolidated
 
Assets
                             
Current assets:
                             
Cash and cash equivalents
  $ ––     $ 14,747     $ 13,989     $ ––     $ 28,736  
Receivables, net
    ––       56,492       44,236       ––       100,728  
Prepaid expenses and other assets
    130       17,638       13,167       ––       30,935  
Advances to subsidiaries
    ––       646,684       82,073       (728,757 )     ––  
Total current assets
    130       735,561       153,465       (728,757 )     160,399  
                                         
Investments in subsidiaries
    513,387       15,166       ––       (528,553 )     ––  
Property and equipment, net
    ––       99,228       7,942       ––       107,170  
Goodwill
    ––       242,199       27,156       ––       269,355  
Intangible assets, net
    ––       102,173       13,555       ––       115,728  
Deferred financing costs
    14,349       ––       ––       ––       14,349  
Other noncurrent assets
    ––       12,331       10,314       ––       22,645  
                                         
Total Assets
  $ 527,866     $ 1,206,658     $ 212,432     $ (1,257,310 )   $ 689,646  
                                         
Liabilities and Stockholder’s Equity (Deficit)
                                       
Current liabilities:
                                       
Trade payables
  $ 79     $ 10,395     $ 5,994     $ ––     $ 16,468  
Other current liabilities
    22,645       49,925       36,092       ––       108,662  
Advances from affiliates
    ––       600,728       128,029       (728,757 )     ––  
Total current liabilities
    22,724       661,048       170,115       (728,757 )     125,130  
                                         
Long-term debt less current maturities
    772,860       ––       ––       ––       772,860  
Other liabilities
    ––       32,223       26,864       ––       59,087  
Total liabilities
    795,584       693,271       196,979       (728,757 )     957,077  
Stockholder’s equity (deficit):
                                       
Stockholder’s equity (deficit) GXS Worldwide, Inc.
    (267,718 )     513,387       15,166       (528,553 )     (267,718 )
Non-controlling interest
    ––       ––       287       ––       287  
Total stockholder’s equity (deficit)
    (267,718 )     513,387       15,453       (528,553 )     (267,431 )
                                         
Total Liabilities and Stockholder’s Equity (Deficit)
  $ 527,866     $ 1,206,658     $ 212,432     $ (1,257,310 )   $ 689,646  
 
 
23

 
 
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Condensed Consolidating Statements of Operations and Comprehensive Income (Loss)
Three Months Ended March 31, 2011
(In thousands)
(Unaudited)
 
   
Parent
   
Guarantors
   
Non-Guarantors
   
Eliminations
   
Consolidated
 
                               
Revenues
  $ ––     $ 95,678     $ 52,973     $ (34,543 )   $ 114,108  
                                         
Costs and operating expenses
    26       77,663       53,152       (34,543 )     96,298  
Restructuring charges
    ––       61       140       ––       201  
Operating income (loss)
    (26 )     17,954       (319 )     ––       17,609  
Other income (expense), net
    (21,176 )     486       197       ––       (20,493 )
Income (loss) before income taxes
    (21,202 )     18,440       (122 )     ––       (2,884 )
Provision for income taxes
    ––       63       847       ––       910  
Income (loss) before equity in income (loss) of subsidiaries
    (21,202 )     18,377       (969 )     ––       (3,794 )
Equity in income (loss) of subsidiaries
    17,408       (969 )     ––       (16,439 )     ––  
Net income (loss)
    (3,794 )     17,408       (969 )     (16,439 )     (3,794 )
Foreign currency translation adjustments
    ––       ––       1,085       ––       1,085  
Comprehensive income (loss)
    (3,794 )     17,408       116       (16,439 )     (2,709 )
Less:  Comprehensive income attributable to non-controlling interest
    ––       ––       10       ––       10  
Comprehensive income (loss) attributable to GXS Worldwide, Inc.
  $ (3,794 )   $ 17,408     $ 106     $ (16,439 )   $ (2,719 )
 
 
24

 
 
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Condensed Consolidating Statements of Operations and Comprehensive Income (Loss)
Three Months Ended March 31, 2012
(In thousands)
(Unaudited)
 
   
Parent
   
Guarantors
   
Non-Guarantors
   
Eliminations
   
Consolidated
 
                               
Revenues
  $ ––     $ 101,751     $ 53,242     $ (36,081 )   $ 118,912  
                                         
Costs and operating expenses
    34       80,114       56,280       (36,081 )     100,347  
Restructuring charges
    ––       286       95       ––       381  
Operating income (loss)
    (34 )     21,351       (3,133 )     ––       18,184  
Other income (expense), net
    (21,377 )     3       (683 )     ––       (22,057 )
Income (loss) before income taxes
    (21,411 )     21,354       (3,816 )     ––       (3,873 )
Provision for income taxes
    ––       352       397       ––       749  
Income (loss) before equity in income (loss) of subsidiaries
    (21,411 )     21,002       (4,213 )     ––       (4,622 )
Equity in income (loss) of subsidiaries
    16,789       (4,213 )     ––       (12,576 )     ––  
Net income (loss)
    (4,622 )     16,789       (4,213 )     (12,576 )     (4,622 )
Foreign currency translation adjustments
    ––       ––       1,320       ––       1,320  
Comprehensive income (loss)
    (4,622 )     16,789       (2,893 )     (12,576 )     (3,302 )
Less:  Comprehensive income attributable to non-controlling interest
    ––       ––       5       ––       5  
Comprehensive income (loss) attributable to GXS Worldwide, Inc.
  $ (4,622 )   $ 16,789     $ (2,898 )   $ (12,576 )   $ (3,307 )
 
 
25

 
 
GXS WORLDWIDE, INC. AND SUBSIDIARIES
Condensed Consolidating Statements of Cash Flows
Three Months Ended March 31, 2011
(In thousands)
(Unaudited)
 
   
Parent
   
Guarantors
   
Non-Guarantors
   
Eliminations
   
Consolidated
 
Cash flows from operating activities:
                             
Net income (loss)
  $ (3,794 )   $ 17,408     $ (969 )   $ (16,439 )   $ (3,794 )
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
                                       
Depreciation and amortization
    ––       11,181       1,741       ––       12,922  
Deferred income taxes
    ––       ––       135       ––       135  
Amortization of deferred financing fees and debt discount
    1,706       57       ––       ––       1,763  
Unrealized gain on interest rate swap
    (2,365 )     ––       ––       ––       (2,365 )
Stock compensation expense
    ––       209       ––       ––       209  
Equity in net (income) loss of subsidiaries
    (17,408 )     969       ––       16,439       ––  
Changes in operating assets and liabilities, net
    29,863       (17,666 )     1,588       ––       13,785  
Net cash provided by operating activities
    8,002       12,158       2,495       ––       22,655  
                                         
Cash flows from investing activities:
                                       
Purchases of property and equipment (including capitalized interest)
    ––       (9,899 )     (891 )     ––       (10,790 )
RollStream acquisition, net of cash acquired of $4
    ––       (1,125 )     ––       ––       (1,125 )
Net cash used in investing activities
    ––       (11,024 )     (891 )     ––       (11,915 )
                                         
Cash flows from financing activities:
                                       
Repayments under revolving credit facility
    (8,000 )     ––       ––       ––       (8,000 )
Payment of financing costs
    (2 )     ––       ––       ––       (2 )
Net cash used in financing activities
    (8,002